OECD sees hard times for Russia

Russia's stong recovery came to a grinding halt because of the downturn

The worldwide recession has brought Russia's strong economic recovery to a "sudden end", says the Organisation for Economic Co-operation and Development.

In its latest economic survey, the OECD says it expects the Russian economy to shrink by 6.8% this year, before recovering to grow 3.7% in 2010.

It says barriers to foreign investment should be reduced.

As well as a weaker rouble and lower rates, it has also recommended less political involvement in its companies.

The OECD has highlighted other ways in which Russia could streamline its economy.

It has called for less political interference by the Kremlin in state-owned companies.

"Reducing state interference in economic activity and carrying out necessary administrative and regulatory reforms would not only increase domestic investment and productivity, but also increase foreign investor interest in the Russian Federation," the report said.

There are champions of liberal economy in the government, there are also conservatives keen on state regulation, so Russia's economic policies depend on the outcome of these two groups' tug-of-war Natalia Leshchenko, IHS Global Insight

In the short term, the OECD thinks Russia must focus monetary policy to make "financial conditions as easy as possible", even if that means accepting a weaker rouble and reducing the state's role as an owner of banks.

Russia has been getting back on its feet since its own financial crisis of 1998. Back then, it defaulted on its debts and the rouble devalued by almost 75%.

The OECD notes its government and central bank reacted swiftly to the current worldwide downturn, providing liquidity and capital to the banking system.

It said Russia was well-placed to cope with a large fiscal deficit in 2009, because it accumulated reserves saved in better times during the oil-fuelled boom.

Long-term solution

In the long term, the OECD says the current downturn has highlighted Russia's vulnerability to oil and so it has advised a shift on developing non-oil sectors of the economy.

The deficiencies of an exchange rate-focused monetary policy are also noted, with the OECD urging Russia to speed up its planned move to inflation targeting.

"There are champions of liberal economy in the government, there are also conservatives keen on state regulation, so Russia's economic policies depend on the outcome of these two groups' tug-of-war," said senior Russia analyst for IHS Global Insight Natalia Leshchenko.

Last month, Russia started talks for membership of the 30-nation body of the OECD - sometimes called the "rich nations' club", since all its members are industrialised countries.

The organisation regularly writes reviews of partner and member countries' economies.